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Should Unemployment Taxes Be Withheld When Imputing Stocks?

Original post by Michael Wolfe of Demand Media

When attempting to impute the value of a company -- and by extension, the value of its stock -- a financial analyst will use a number of different factors. Among these is the costs that the company is required to pay to operate. These will include unemployment taxes paid to the government, a vital part of having employees. An analyst should factor this in to his analysis, but not give it much weight.

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Stock Valuation

When attempting to determine a stock's "true" price, an analyst will generally begin by attempting to determine how much the company is worth. Once he has arrived at a company's true value, he can divide this by the number of shares of ownership in the company. This would give the company's "true" share price. However, the analyst will need a lot of information about the company's operations.

Variables

When determining a company's true value, an analyst needs to pick from a number of different variables that weigh on the company's financial performance. In many cases, the analyst's data will be limited. However, due to financial disclosure, the analyst may be able to determine how much the company paid in taxes, including in unemployment taxes -- a tax required of all employers.

Unemployment Taxes

Unemployment taxes are generally paid by employers based on the size of their payroll. This money is placed in a fund from which states can draw to pay for unemployment insurance to people whom they have laid off. This tax may cut into a company's profits. Therefore, an analyst attempting to determine a company's value should factor it into his equation.

Considerations

However, unemployment taxes are relatively small compared to other taxes that a company will likely have to pay to the government. Also, these taxes are relatively consistent across all employers -- unlike other variables, such as the employer's profits and operating costs. Therefore, an analyst should not withhold these taxes when imputing a stock, but it shouldn't figure heavily into his evaluation.


                   

References

  • "Investing for Dummies"; Eric Tyson; 2009

About the Author

Michael Wolfe has been writing and editing since 2005, with a background including both business and creative writing. He has worked as a reporter for a community newspaper in New York City and a federal policy newsletter in Washington, D.C. Wolfe holds a B.A. in art history and is a resident of Brooklyn, N.Y.


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